When does refinancing make sense?
Refinancing replaces your current mortgage with a new one — usually to get a lower interest rate, a lower payment, or a shorter term. It isn't free: closing costs typically run 2–5% of the loan amount. The key question is whether you'll keep the new loan long enough for the savings to outweigh those costs.
The break-even point
If refinancing costs $5,000 and saves $250 a month, you break even after 20 months. If you expect to sell or refinance again before then, refinancing probably isn't worth it.
Watch the total cost, not just the payment
Resetting to a new 30-year term can lower your payment even with little or no rate improvement — but it stretches your debt over more years and can increase the total interest you pay. That's why this calculator compares the total remaining cost of both loans, including closing costs. Refinancing into a shorter term (like 15 years) often raises the payment but saves the most interest.
Points and rolled-in costs
Discount points are prepaid interest: each point costs 1% of the loan and lowers your rate. Rolling closing costs into the new loan avoids paying cash up front, but you'll pay interest on them for the life of the loan.
How much a lower rate saves
For a $300,000 balance currently at 7%, refinanced into a new 30-year loan with $6,000 in closing costs (current payment $1,995.91):
| New rate | New payment | Monthly savings | Break-even |
|---|---|---|---|
| 6.5% (0.5 point lower) | $1,896.20 | $99.70 | 61 months (about 5 years) |
| 6.0% (1 point lower) | $1,798.65 | $197.26 | 31 months |
| 5.5% (1.5 points lower) | $1,703.37 | $292.54 | 21 months |
A half-point drop takes five years to pay for itself here; a full point takes about two and a half. The traditional advice to refinance only when you can cut your rate by a full percentage point is a simplification of this — what really matters is whether you'll keep the loan past the break-even point.
Worked example
You owe $300,000 at 7.25% with 27 years left, paying $2,112.58 a month. You're offered 6% on a new 30-year loan with $5,000 in closing costs paid in cash. The new payment is $1,798.65 — a saving of $313.93 a month, with a break-even after 16 months. Over the life of the loans you'd pay about $32,000 less in total, even though the new loan runs three years longer.
Frequently asked questions
What do closing costs include?
Typically a lender origination fee, appraisal, title search and insurance, recording fees and sometimes discount points. Expect roughly 2–5% of the loan amount. Ask each lender for a Loan Estimate so you can compare the totals line by line.
Is a "no-closing-cost" refinance really free?
No. The costs are either added to your loan balance or covered by the lender in exchange for a higher interest rate. It can still be a good choice if you expect to move or refinance again within a few years, because you avoid paying cash up front for savings you won't be around to collect.
Should I pay points for a lower rate?
One point costs 1% of the loan and usually lowers the rate by around a quarter of a percentage point. Points pay off only if you keep the loan long enough — enter them above and look at how the break-even point changes.
What is a cash-out refinance?
It's a refinance for more than you currently owe, with the difference paid to you in cash. It can be a cheaper way to borrow than credit cards or personal loans, but it increases your debt and puts your home on the line. To model it, enter the new, larger loan as your balance.
Does refinancing hurt my credit score?
Applying causes a small, temporary dip from the credit inquiry. Rate-shopping with several lenders within a short window (commonly 14–45 days, depending on the scoring model) is generally treated as a single inquiry.